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Preparing for the 2015 ProxySeason
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA;Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer BrownJSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, providecustoms and trade advisory and consultancy services, not legal services. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Laura D. RichmanCounsel
+1 312 701 [email protected]
November 5, 2014
Jennifer J. CarlsonPartner
+1 650 331 [email protected]
Harry R. BeaudryPartner
+1 713 238 [email protected]
Michael L. HermsenPartner
+1 312 701 [email protected]
Introduction and Overview
• Speakers
– Mike Hermsen
– Laura Richman
– Harry Beaudry
Jen Carlson– Jen Carlson
2
Introduction and Overview (cont’d)
• Agenda
– What’s on the radar but not ripe for the upcoming proxy season
– Say-on-Pay and other compensation related matters
– Shareholder Proposals
Annual meeting and proxy statement matters– Annual meeting and proxy statement matters
3
Introduction and Overview (cont’d)
• What’s on the radar
– Pay ratio disclosures
• Rules proposed September 18, 2013
– Pay for performance disclosures
– Hedging policy disclosures– Hedging policy disclosures
– Listing standards with respect to recovery of incentive-basedcompensation in certain situations
– Disclosure reform project
– Shareholder proposal reform
4
Effective Compensation Disclosure in Proxy Statement
• Use proxy summaries for better overview andcomparisons of pay for performance relationship
• Use CD&A to “tell the story” about compensationdecisions and rationale; avoid boilerplate descriptions
• Say-on-pay has increased the importance of using• Say-on-pay has increased the importance of usingexecutive summaries in CD&A
• Use of “layered” narrative, highlighting critical aspectsof compensation and pay for performance early inCD&A
5
Compensation Presentation Highlights
• Hyperlinked table of contents
– CD&A subsections and compensation tables
• Graphs and charts to communicate message– Disclosing TSR vs. CEO pay
– Utilizing proxy performance graphs and variations thereof to address TSR
– Utilizing graphs displaying pay and performance based on measures such asrevenue and earnings per share growthrevenue and earnings per share growth
• Graphic tools– Color
– Font
– Layout
– Symbols
• Plain English
• Realized pay
6
Compensation Discussion and Analysis
• Principles based
– No boiler plate
• Clear discussion of performance targets
• Clear discussion of how compensation is calculated
• Peer group benchmarking discussion• Peer group benchmarking discussion
– Identify peer group
• Compensation risk
– Not required to disclose absence of risk
– Disclosure does not have to be in CD&A
7
Realized Pay Disclosures
• Realized pay is NOT required disclosure
• Compensation required to be reported in the summarycompensation table often is realizable only if performancemeasures are met or stock price level is achieved
• In the summary compensation table equity-based awardsmust be included for the year granted, at grant-date fairmust be included for the year granted, at grant-date fairvalue
• In realized pay disclosure, equity awards are typicallyincluded at the value realized when restrictions on stockawards lapse or options are exercised
• W-2 compensation used as measure of realized pay
8
Realized Pay Columns:General Electric 2014 proxy statement
• GE includes W-2 realized compensation in its summarycompensation and realized compensation table of its proxysummary, with columns labeled:
– SEC total
– SEC total without change in pension value
W-2 Realized comp.– W-2 Realized comp.
• GE also provides a separate realized pay table, following thecompensation committee report, reporting W-2compensation, but noting that realized pay is not a substitutefor total compensation
• GE provides information on calculation of realized pay insupplemental materials on its proxy website
9
Realized Pay Columns:Chiquita Brands 2014 proxy statement
• Chiquita’s proxy summary includes Summary Compensationand Realized Compensation table
• SCT also has a realized pay column, with footnote explainingthat:
– realized pay is not a substitute for the SEC total
– total realized pay represents:– total realized pay represents:
• total SEC compensation, minus
• the aggregate grant date fair value of equity awards (as reflected in theStock Awards and Option Awards columns), plus
• the value realized from the vesting of restricted stock units beforepayment of withholding taxes and brokerage commissions
– option vesting not included where options not exercised
– and NEOs did not sell vested equity other than to pay taxes
10
Example of Realized Pay Bar Graph:Paychex Inc. 2014 proxy statement
11
Example of Realizable and Realized Pay Presentation:Coca Cola 2014 proxy statement
12
Non-GAAP Disclosures in CD&A
• Target levels that are non-GAAP financial measures are not subject toRegulation G
– Must disclose how the number is calculated from audited financial statements
• This approach is limited to CD&A disclosure of target levels and thedisclosure of the actual results of the financial measure that is used as atarget
• Other non-GAAP financial measures presented anywhere in the proxy• Other non-GAAP financial measures presented anywhere in the proxystatement are subject to the requirements of Regulation G
• For pay-related circumstances only, the required GAAP reconciliation andother information can be in a cross-referenced annex to the proxystatement
• If the non-GAAP financial measures are the same as those included in theForm 10-K, a prominent cross-reference to the Form 10-K pages containingthe required GAAP reconciliation and other information is permitted
13
Say-On-Pay
• SEC Rule 14a-21(a) requires issuers to hold a separate non-binding shareholder say-on-pay vote to approve or disapprovecompensation of named executive officers (say-on-pay)
• SEC Rule 14a-21(b) requires a non-binding shareholder vote onwhether say-on pay votes should occur every 1, 2 or 3 years(say-when-on-pay)(say-when-on-pay)
• SEC Rule 14a-21(c) requires a non-binding shareholder vote oncompensation when an acquisition, merger, consolidation orasset sale is being voted on (say-on-golden parachutes)
14
Say-On-Pay Vote
• Vote relates to approval of compensation of “named executive officers”(i.e., named in proxy compensation tables) generally as disclosed in theproxy statement, but not individual elements of compensation orcorporate practice
• Say-on-pay must happen at least every 3 years, but is now typically anannual vote
• Vote results must be disclosed on Form 8-K within 4 business days of• Vote results must be disclosed on Form 8-K within 4 business days ofshareholders meeting
• Vote is “advisory” so cannot compel companies to do anything(although effect of significant shareholder disapproval, as well as ISSnegative recommendations, will get companies’ attention)
• Item 402(b) of Reg. S-K requires companies to disclose in their CD&Awhether they considered the results of the most recent shareholdersay-on-pay vote and, if so, how that consideration affected executivecompensation decisions and policies
15
Communicating with Shareholders
• Say-on-pay has promoted communications with shareholders toconvey important elements of compensation policy and receiveshareholder input
– Since vote itself does not reveal particular compensation issues,companies need shareholder reach-out to determine specificconcernsconcerns
• Say-on-pay has heightened importance of such communicationsin view of potential negative recommendations by proxyadvisers
• Key—Regular communication with shareholders throughout theyear
16
2014 Say-on-Pay Russell 3000 Voting Results
• As of September 2014, 92.2% of Russell 3000 companies havepassed all 4 years mandatory say-on-pay years, while 6.5%have passed in 3 years and failed in 1 year
– Only 2.4% of Russell 3000 companies failed say-on-pay in 2014
• Russell 3000 companies that failed in 2013 received 36% moresupport on average in 2014 through the beginning ofsupport on average in 2014 through the beginning ofSeptember 2014
17
Source: Semler Brossy 2014 Say-on-Pay Results (September 10, 2014)
Impact of Proxy Advisory Firms on Vote Results
• ISS “against” recommendation does not necessarily lead to afailed say-on-pay vote
• In 2014, ISS recommended that shareholders vote “against”say-on-pay at about 13% of Russell 3000 companies itevaluated
• On average, shareholder support was 28% lower when ISSOn average, shareholder support was 28% lower when ISSrecommended a say-on-pay vote “against”
• Of the Russell 3000 companies receiving an “against”recommendation from ISS, only 19% failed to receive at least50% support for their executive compensation
– An additional 39% only received support between50%−70%
18
Source: Semler Brossy 2014 Say-on-Pay Results (September 10, 2014)
ISS Methodology
• ISS will generally recommend a vote “against” a company’s say-on-pay proposal if any of the following is true:
– Significant misalignment between CEO compensation andcompany performance (pay-for-performance)
– Maintaining significant problematic pay practices
– Board exhibits poor communication and responsiveness to– Board exhibits poor communication and responsiveness toshareholders
• ISS may recommend votes “against” or “withhold” forcompensation committee members and potentially full boardif no say-on-pay on ballot or if ISS sees issues with problematiccompensation practices or if the company does not respondadequately to compensation issues
19
ISS Peer Group Evaluations
• ISS selects peer group generally containing 14 to 24 companies based on
– Market Cap
– Revenue (sometimes asset) size
– Global Industry Classification Standard (“GICS”) industry group
– Company’s selected peers’ GICS industry group with size constraints
• For Russell 3000, ISS analyzes:
– Peer Group Alignment– Peer Group Alignment
• Degree of alignment between the company’s annualized total shareholder return(TSR) rank and CEO annualized total pay rank within peer group, each measuredover a 3-year period
• Multiple of CEO total pay relative to peer group median
– Absolute alignment between trend in CEO pay and company TSR over a 5-year period
• If ISS believes there is significant long-term pay-for-performance misalignment, orfor non-Russell 3000 companies if ISS thinks misaligned pay and performance areotherwise suggested, ISS will look to a number of other qualitative factors
20
Issuer Challenges to ISS Say-on-PayRecommendations
• Companies receiving a proxy advisory negativerecommendation sometimes file a response asadditional definitive materials with the SEC
• No requirement to make such a response, but if oneis to be used it must be filed with the SECis to be used it must be filed with the SEC
• Response not likely to reverse ISS recommendation
21
Responses to Failed Say-on-Pay Disclosures:Common Review Measures
• Compensation committee review of the company’scompensation policy
• Directly contacting shareholders holding a significantpercentage of shares
• Obtaining feedback from outside compensationconsultant
• Talking with proxy advisory firms
• Improving explanation of policy to shareholders
22
Responses to Failed Say-on-Pay Disclosures:Common Changes
• Compensation that is more performance-based
• Amendments to long-term incentive plans, employmentagreements and/or change in control agreements
• Eliminated tax gross-ups
• Peer group adjustments• Peer group adjustments
• Adoption of compensation guidelines
• Reduced or eliminated perquisites
• No excessive retirement benefits
23
Responses to Failed Say-on-Pay Disclosures:Common Corporate Governance Changes
• Clawback policy
• Anti-hedging and anti-pledging policies
• Stock ownership and holding requirements
• Increased disclosure of revenue or other targets• Increased disclosure of revenue or other targets
24
Examples of Formats:Boston Properties
25
Examples of Formats:Boston Properties (Cont’d.)
26
Examples of Formats:Alexandria Real Estate Equities
• Executive Summary Bullet Points
– Background
– Compensation Committee Response – Stockholder Outreach
– Compensation Committee Response – Changes Made inResponse to Stockholder ConcernsResponse to Stockholder Concerns
• Say-on-Pay Vote Results 2011-2013 Section of CD&A
• Compensation Committee Actions in Response to the2013 Say-on-Pay Vote Section of CD&A
• Changes Made in Response to Stockholder ConcernsUnderlying the 2013 Say-on-Pay Vote Section of CD&A
27
Examples of Formats:Gentiva Health Services
• Executive Summary
2013 Say-on-Pay Vote—Our Response
– Subheadings:
1. Shareholder outreach:
2. Shareholder advisory firm outreach:2. Shareholder advisory firm outreach:
3. Program design changes in response to say-on-pay vote:
– Long-term performance program grants:
• Performance measurement period:
• Total shareholder return (“TSR”):
– Recoupment (“Clawback”) Policy:
– Double trigger requirement for accelerated vesting in the event of achange in control:
28
Examples of Formats:Stillwater Mining Company
• Four Part CD&A
• Part 1: Response to May 2013 Say on Pay Vote and Summary of ExecutiveCompensation Program Changes
– Summary chart addressed 9 elements of pay design
– Excerpt from summary chart:
29
Examples of Formats:Stillwater Mining Company (cont’d.)
• Part 2: Changes to the 2014 Compensation Program
− Examples of the charts used in this section:
30
Examples of Formats:Stillwater Mining Company (cont’d.)
31
Examples of Format:Atlas Air Worldwide Holdings, Inc.
• Overview—Compensation Program Updates After the 2013 Say-On-Pay Vote
– Excerpt from chart addressing 9 areas of focus:
32
Examples of Formats:Volcano Corporation
• Excerpt from chart addressing 8 areas of concern:
33
Examples of Formats:Volcano Corporation (cont’d)
• Excerpt from chart comparing what they do and don’t do:
Key Features of Our 2014 Executive Compensation Program
WHAT WE DO WHAT WE DON’T DO
We tie pay to performance by providing a significantamount of compensation that is at riskWe use objective corporate performance criteria as themetrics for vesting of our PRSUs and funding of ourshort-term incentive planWe align pay and performance by selecting objectiveperformance criteria that create stockholder value
We do not have excise tax gross-ups for change-in-controlseverance benefitsWe do not provide excessive perquisitesWe do not allow hedging or pledging of Company stockWe do not provide our NEOs with guaranteed annualsalary increases or guaranteed bonusesWe do not pay dividend equivalents on unvested restricted
34
performance criteria that create stockholder valueWe target pay at the 50th percentile of peersWe have stock ownership guidelinesWe have a clawback policyWe pay reasonable cash compensation to our seniorexecutivesWe provide appropriate benefits to our seniorexecutivesWe have maximum payout amounts for cash and stockpaid to our senior executivesWe retain an independent compensation consultantWe have “at-will” employment agreements with ourNEOsWe have “double trigger” change-in-control cashcompensation severance arrangements with our seniorexecutivesWe schedule and price equity grants to promotetransparency and consistency
We do not pay dividend equivalents on unvested restrictedstock unitsWe do not allow for repricing of underwater stock options(including cash-outs) without prior stockholder approvalWe do not maintain compensation programs that webelieve create risks reasonably likely to have a materialadverse impact on the CompanyWe do not have a supplemental executive retirement planthat provides pension or other benefits to our NEOs
Examples of Formats:OraSure Technologies Inc.
• As a general matter, our stockholders:
* * *
– Supported the use of equity awards that vested uponachievement of objective performance metrics, but clearlyrecognized that:recognized that:
• TSR did not need to be a specific performance metric embedded in equitycompensation and that other metrics, such as revenues or operatingperformance, could be used; and
• Using TSR as a vesting metric may not be appropriate for the Companybecause of the volatility of its stock and the need to heavily invest inproduct and clinical development.
35
Examples of Formats:OraSure Technologies Inc. (cont’d.)
• CD&A disclosed that company considered this concernbut did not change its time-based practice
– . . .The Board strongly believes its current practice of using stock options for
60% of executive equity awards is equally effective to awarding restrictedstock with vesting tied to increased TSR since in both cases the recipient ofthe award will receive no actual value unless our stock price increases afterthe grant date. Moreover, the Board was very concerned that the use ofthe grant date. Moreover, the Board was very concerned that the use ofperformance metrics might result in improper or unintended incentives forour executives. For example, a metric such as revenue growth or improvedprofitability might be a disincentive for management to invest in productdevelopment or complete an acquisition or divestiture that adversely affectsour financial performance for the next year or two but is neverthelessbeneficial to the Company over the long term. . . For these reasons, the Boarddetermined not to adopt performance vesting at this time, but concluded thatit would remain open to considering equity awards with performance vestingin the future as the Company’s business continues to grow and mature.
36
Say-on-Pay Litigation
• First lawsuits were filed against a number of companies and their boards ofdirectors where say-on-pay proposals failed to garner majority approval, allegingbreaches of fiduciary duty
• Subsequent suits alleging insufficient compensation disclosures in the proxystatements, seeking to enjoin the shareholder vote unless the company providedadditional compensation disclosures
– In June 2014, Cheniere Energy postponed its meeting due to a lawsuit filedabout 2 weeks before meeting which, among other things, sought to enjointhe meeting until corrective disclosures were madethe meeting until corrective disclosures were made
• Some lawsuits challenging specific compensation actions, for example, based onfailure to comply with Section 162(m) of the Internal Revenue Code
• Lawsuits were also filed regarding outside director compensation
• In addition to filed lawsuits, plaintiffs’ law firms announced “investigations” ofexecutive compensation at a number of companies
• Publicity surrounding pay-related lawsuits may have motivated more strenuousresponses to negative ISS recommendations
37
Litigation Fact Pattern Allegations
• Pay not connected to performance despite pay forperformance disclosures
• Negative vote on say-on-pay
• Company did not change compensation following vote
• Disclosure not adequate to permit vote• Disclosure not adequate to permit vote
• Material omissions
38
Claims Raised by Litigation
• Directors breached duty of care and loyalty
• Misrepresentation/noncompliant disclosure in the proxystatement
• Failure to comply with Section 162(m)
• Corporate waste
• Consultants aided/abetted and/or breached contract
• Executives or directors unjustly enriched
• Issues with respect to stock plan approval
– Vote counting and treatment of abstentions (Cheniere Energy case)
39
Level and Type of Litigation Risk
• Directors acting in good faith may be protected by the businessjudgment rule
• Dodd-Frank expressly provided that the say-on-pay vote
– Was non-binding
– Did not overrule decisions of the board of directors
– Did not change fiduciary duties– Did not change fiduciary duties
– Did not add fiduciary duties
• Reputational risk
• Costs of litigation and potential settlements, even ifsuccessfully defended
• Risk of annual meeting being enjoined could impact othercorporate initiatives
40
Shareholder Proposals in 2014
• Modest decrease in shareholder proposal activity
• Fewer shareholder proposals received majority support
• Social policy proposals were the most commonly submitted,but were not widely supported by shareholders
• Fewer corporate governance proposals submitted with greater• Fewer corporate governance proposals submitted with greaterfocus on board composition
• Growing support for proxy access
• Activist investors becoming more active and influential
• Shareholder and proxy advisor outreach
41
Shareholder Proposal Topics – Corporate Governance
• Independent chair
– Support for this proposal declined in 2014
– If strong alternative structure, shareholders not likely toapprove
• Majority voting• Majority voting
– Those that failed were mostly at companies with pluralityvoting with a resignation policy
• Board declassification/annual director elections
– Fewer proposals submitted and voted on in 2014
– Strongly supported by shareholders
42
Shareholder Proposal Topics – Corporate Governance(cont’d.)
• Action by written consent
– Concerns about disenfranchisement of some shareholders
• Right to call special meeting
– Seek to enhance shareholder ability to call special meetings
• Cumulative voting
– Institutional shareholders generally not in favor
• Supermajority voting
– Seeks to eliminate supermajority voting provisions
43
Shareholder Proposal Topics – Corporate Governance(cont’d.)
• Proxy access proposals – trending upward?
• Proposed SEC Rule 14a-11
– Would have required companies to include shareholdernominees for election to board in proxy statement
– Vacated by the U.S. Court of Appeals for the District of– Vacated by the U.S. Court of Appeals for the District ofColumbia
• Private Ordering
– Rule 14a-8(i)(8) allows shareholders to propose proxy accessprocedures
– Abercrombie & Fitch, Big Lots!, Nabors
– Growing support for 3%, 3-year formula
44
Shareholder Proposal Topics – Corporate Governance(cont’d.)
• Board composition: tenure and diversity
– Historically, little support for board composition proposals
– Proposals often withdrawn when companies engage
– Recent focus on board tenure:
• Negative factor in ISS governance rating• Negative factor in ISS governance rating
• Long tenure seen as “problematic” by 74% of institutional investors
• May see increase in proposals in this area (Costco)
– Shift in board diversity proposals
• Greater emphasis on gender diversity
• Progress report
45
Shareholder Proposal Topics – Political Spending /Lobbying
• Citizens United decision (U.S. Supreme Court – 2010)
• Remains the most popular shareholder proposal initiative
– Most frequently submitted and voted on proposal in 2014
– Most active proponent: New York State Common RetirementFundFund
• Only modest support for these proposals:
– Average support in 2014 was 21% of votes cast
– Proposals that limit or prohibit political contributions orlobbying activities are the least popular
– Proposals that focus on disclosure fare better, but none passedin 2014
46
Shareholder Proposal Topics – Environmental Issues
• Climate change
– Typically a report on efforts to reduce greenhouse gasemissions
– Also, financial risks arising from climate change, adoption ofprinciples to reduce global warming
• Sustainability
– File reports on sustainability efforts
• Other environmental issues
– Hydraulic fracturing, coal-related proposals, recycling, waterscarcity, oil sands, toxic substances
47
Shareholder Proposal Topics – Compensation Issues
• Significant drop in number of proposals voted on in 2014
– 61 proposals voted on, averaging 25% support
• Proposal types:
– Limit acceleration of vesting of equity awards upon a change ofcontrolcontrol
• Four proposals received majority support, first time since 2010
• Average support increased to 35%
– Require executive officers to retain a percentage of stockawards through retirement
– Other proposals covered a variety of compensation issues
48
Receipt of Shareholder Proposal
• Rule 14a-8
• Initial assessment of proposal and proponent
• Check for technical deficiencies immediately
– Verify ownership
– 500 words or less
– Is it late?
– Other
• Respond to proponent within 14 days of receipt
• Opportunity to cure deficiency
49
Evaluation of Shareholder Proposal
• Evaluate whether any other grounds for exclusion exist:
– Relates to ordinary business operations
– Not relevant to the company’s business
– Substantially implemented
– Company lacks power or authority to implement– Company lacks power or authority to implement
– Violates proxy rules
– Improper under state law or violates the law
– Involves personal claim or grievance
– Other
50
Preparing the No-Action Request
• Deadline for submission – 80 days before definitive proxy
– Otherwise, must obtain a waiver from SEC
• The No-Action request letter
– Identify all plausible arguments for exclusion
Cite the most recent applicable authority– Cite the most recent applicable authority
– Submit to SEC and proponent (with other documentation)
• Proponent may submit rebuttal
• SEC may give proponent opportunity to cure deficiency
51
The Opposition Statement
• Must be sent to the proponent of the shareholder proposalnot later than 30 days before the definitive proxy is filed
– Prepare and send even if awaiting SEC no-action response
– Shareholder proponent can object to false or misleadingstatementsstatements
• Research relevant proxy advisor voting policies and address inopposition statement
• Engage institutional shareholders and proxy advisors
• Consider whether additional soliciting materials should beprepared and filed
52
Compensation Committee Member Independence
• Stock exchange listing standards became effective in July 2013
• Compliance with compensation committee memberindependence standards was required for all companies as ofthe earlier of
– The first annual meeting after January 15, 2014 and– The first annual meeting after January 15, 2014 and
– October 31, 2014
• NYSE and Nasdaq provisions are very similar
• One major difference is that Nasdaq now requires a listedcompany to have a compensation committee
53
Compensation Committee Member Independence
• Members must satisfy general independence standards
• Board must consider the following factors
– Source of compensation of the director
– Whether the director is affiliated with the company, asubsidiary or an affiliate of a subsidiarysubsidiary or an affiliate of a subsidiary
• Board must also consider all factors specifically relevant todetermining whether the director’s relationships impact theability to be independent from management
54
Compensation Committee Adviser Requirements
• Compensation committees may select a consultant, counsel orother adviser only after taking into account:
– The provision of other services to the company by the personthat employs the adviser
– The amount of fees received from the company to theemployer of the adviser, as a percentage of total revenue
– The policies and procedures of the employer of the adviser thatare designed to prevent conflicts of interest
– Any business or personal relationship of the adviser with amember of the compensation committee
– Any stock of the company owned by the adviser
– Any business or personal relationship of the advisor of theemployer of the advisor with an executive officer
55
Compensation Committee Adviser Requirements(cont’d.)
• A listed company is required to conduct an independenceassessment with respect to any advisor or consultant otherthan:
– In-house counsel
– Any adviser whose role is limited to– Any adviser whose role is limited to
• consulting on any broad-based plan that does not discriminate in scope,terms or operation in favor of executive officers or directors and that isgenerally available to all salaried employees
• providing information that either is not customized for a particularcompany or that is customized based on parameters that are notdeveloped by the adviser, and about which the adviser does not provideadvice
56
Compensation Committee Adviser Requirements(cont’d.)
• Compensation consultant conflict of interest disclosure
– Effective for 2013 proxy season
– Disclose the nature of the conflict and how it is being addressed
– Consider the same factors used for determining independence
• Changes may be necessary in compensation committee• Changes may be necessary in compensation committeecharters, corporate governance guidelines and D&Oquestionnaires
57
D&O Questionnaires
• Compensation Committee Independence
– Any business or personal relationships with a compensationconsultant retained, or proposed to be retained, by thecompany or the compensation committee?
– Any consulting, advisory or other compensatory fee paid to thedirector by the company or any of its subsidiaries?director by the company or any of its subsidiaries?
– Is the director affiliated with the company, any of itssubsidiaries, or an affiliate of any subsidiary?
• Iran Threat Reduction and Syria Human Rights Act of 2012
– Inquire whether any director or officer has engaged in activitieswith respect to Iran or has knowledge of any company activities
• Any company-specific regulatory developments?
58
Proxy Advisors
• Many institutional investors retain proxy advisory firms tomake recommendations about how to vote
• ISS and Glass Lewis publish voting policies with respect tocompensation, governance, social responsibility and othermatters
• Influence of proxy advisors varies:• Influence of proxy advisors varies:
– Composition and voting profile of shareholder base
– Divergence from proxy advisors on certain issues
59
Proxy Advisors (cont’d.)
• Proxy advisors may be subject to proxy rules and/orsubject to regulation as investment advisors
• SEC and others have discussed additional regulationof proxy advisors
Disclosure of policies, procedures and research undertaken– Disclosure of policies, procedures and research undertaken
– Reporting and management of conflicts of interest
– Proxy advisor registration
– Filing voting recommendations with SEC
60
Proxy Voting Legal Bulletin
• June 30, 2014 Staff Legal Bulletin – Proxy VotingResponsibilities of Investment Advisers and Availability ofExemptions from the Proxy Rules for Proxy Advisory Firms
• Responsibilities of Investment Advisors
– Steps to demonstrate votes cast in clients’ best interests– Steps to demonstrate votes cast in clients’ best interests
– Considerations when retaining a proxy advisor
– Accuracy of facts used in proxy advisors’ recommendations
• Proxy Advisory Firms
– When subject to proxy rules and when exempt
– Steps for exemption and conflicts of interest
61
Vote Standards and Vote Counting
• Proxy statement required disclosure:
– Vote required for approval of a matter or election of directors
– Method by which votes will be counted, including treatmentand effect of abstentions and broker non-votes
• Recent interest in vote standards and counting• Recent interest in vote standards and counting
– Shareholder proposals to establish a “for and against” standard,ignoring abstentions and broker non-votes
– Cheniere Energy litigation and DGCL §205 action regardingapplication of vote standards and counting under the DGCL,NYSE market rules and the company’s bylaws
62
Vote Standards and Vote Counting (cont’d.)
• Review voting standards required for each proposal
– State law (DGCL, etc.)
– Certificate of Incorporation and Bylaws
– Corporate governance principles and other company guidelines
Exchange listing standards– Exchange listing standards
• Determine early whether inconsistencies exist betweenstate law, listing standards and company documents
• Provide clear and accurate disclosure
• Don’t forget about quorum requirements
63
Form 8-K Voting Results (Item 5.07)
• Disclose voting results for each proposal on the ballot
– Number of votes cast for, against or withheld, as well asabstentions and broker non-votes
– For say-on-when-pay, disclose number of votes for each of 1 yr,2 yrs and 3 yrs, as well as abstentions2 yrs and 3 yrs, as well as abstentions
– Separate tabulation for each director nominee
– File within four business days after the annual meeting
• Disclose company’s decision in light of say-on-when-payvote within 150 calendar days after the annual meeting
64
The Annual Meeting
• Meeting logistics – proper planning makes a big difference
– Admission policy, registration and security
– Manage media participation
– Meeting script
– Security– Security
• Rules of conduct are essential
• Dealing with floor proposals
• Dealing with disruptive members of the audience
– Schedule Q&A at the very end of the meeting
• Shareholder proposal must be presented by proponent (orrepresentative)
65
Online/Virtual Meetings
• Allowed under state law and the company’s certificate ofincorporation and bylaws?
• Primary benefits of virtual meetings
– Allows more shareholders to attend, view and participate
– Shows commitment to transparency, cost and environment– Shows commitment to transparency, cost and environment
• Primary drawbacks of virtual meetings
– Legal restrictions and uncertainty
– Technical difficulties
– Concern over limited interaction among shareholders and D&Os
• Substitute vs supplement for in-person meeting
66
Thank you
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA;Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer BrownJSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, providecustoms and trade advisory and consultancy services, not legal services. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Laura D. RichmanCounsel
+1 312 701 [email protected]
Michael L. HermsenPartner
+1 312 701 [email protected]
Harry R. BeaudryPartner
+1 713 238 [email protected]
Jennifer J. CarlsonPartner
+1 650 331 [email protected]
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP both limited liability partnershipsestablished in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); MayerBrown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brownlogo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; MayerBrown International LLP, a limited liability partnership incorporated in England and Wales; JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated.The Mayer Brown Practices are known as Mayer Brown JSM in Asia. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
